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How have various asset classes performed during previous wars

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North Korea, the dictator ruled nation has been threatening the US and its allies with a possible missile attack, which may also have a nuclear warhead on it. The experts are divided on the actual capability of North Korea to undertake the attacks, however, its leader, Kim Jong-un leaves no opportunity to provoke the US and its allies.

Key points

  1. Stocks perform better than average when the conflict starts
  2. Gold rallies before the start of the conflict
  3. Bonds have underperformed stocks during previous wars
  4. The US dollar has fallen on few occasions during a conflict
  5. The current war, if it starts, can severely impact electronic goods
  6. The US national debt is likely to balloon if US involves itself in South Korea’s reconstruction after the war ends

Though North Korea’s military prowess is nothing great to write home about, it can still cause extensive damage to millions of civilian lives and the economy of its neighbor South Korea, to some extent Japan and the US territory of Guam. However, in this article, we shall restrict ourselves to the impact of the war on various asset classes and the world economy. We shall use the historical evidence to arrive at our conclusion.

How does the US stock market perform during wars?

The US has fought several wars since 1960 as shown above. While a few ended quickly, others have been a long-drawn affair. Notwithstanding, Barron’s has outlined the effect of the following seven major hostilities on the Dow Jones Industrial Average since early 1980s.

Serial No War Year
01 The US invasion of Grenada 1983
02 The US invasion of Panama 1989
03 The first Gulf War 1991
04 The US bombing of Kosovo 1999
05 The US War of Afghanistan 2001
06 The second Gulf War 2003
07 The US bombing of Libya 2011

Source: Barron’s

The markets hate uncertainty; a proof of this is the average 0.6% drop in the Dow a month prior to the start of the conflict.

However, once the conflict commenced, the Dow quickly turned direction, rising 4% in the first month. The rally did not stop there. Over the next three months, the Dow rose an average 6.7%, and the gains swelled to 7.2% after six months of the start of the conflict.

Therefore, if history repeats itself, a war between the US and North Korea – if it were to happen – will not start the next bear market.

How does gold perform during wars?

Gold is considered as a safe haven during times of uncertainty. Therefore, the yellow metal has rallied from about $1260/toz to about $1360/toz levels, as tensions escalated between North Korea and the US.

But, will gold continue its rally if the war starts?

Economists at Capital Economics have analyzed gold’s performance since 1985, during military conflicts, acts of terror and political tension.

They established that “over the past forty odd years, the price of gold has on average risen by 4.1% in the six months prior to a conflict turning into a full-blown war. However, it barely moved in the months following the event. This makes sense as gold thrives in periods of elevated uncertainty and the start of an armed conflict partly erases that.”

Performance of long-term bonds during wars

Though bonds are also considered as a safe haven investment, their performance has lagged their historical average during wars, according to a study by the CFA Institute. The possible reasons are an increase in inflation during war times and the second is the higher borrowing by the government to fund the war. Due to these two, bond prices fall. Therefore, selling out of stocks and buying bonds fearing a conflict might not prove to be a good strategy. The only aberration was during the gulf war when bonds beat stocks, albeit marginally.

How does the war affect the US dollar?

The evidence of the past three decades shows that the US dollar weakens during war, according to Kathy Lien, Managing Director of FX Strategy for BK Asset Management. The US dollar fell 5% when the Libyan war started and fell 9% during the first three months of the second gulf war. The dollar was weak even during the first gulf war.

However, this time, the situation is more complex and a lot of currency movements will depend on whether China actively involves itself in the war or remains neutral. The Australian dollar, the New Zealand dollar, and the Japanese Yen will see large moves if China supports North Korea directly during the war, else the movement in the currencies is likely to be comparatively subdued.

“As the tensions grow the dollar will suffer and the actual announcement of war could take USD/JPY to 105 but if it’s a swift victory the pair would also recover quickly,” said Kathy.

Though historical evidence gives us some idea about the possibilities, every new war is different because it involves different nations and affects different asset classes.

What sectors will be affected if a war with North Korea takes place?

Commodities

North Korea, in itself, can’t impact commodity prices. However, it is surrounded by nations that are major consumers of commodities. China is one of the major consumers of commodities, however, it is unlikely that the war will impact China’s consumption materially.

South Korea is a major importer of coal and exporter of steel. Both these commodities will be majorly impacted because South Korea will be severely affected if a war breaks out. Similarly, liquified natural gas prices will be affected, as Japan is its largest importer in the world.

The seaborne trade will also be severely affected because China, South Korea, and Japan receive about one-third of the global seaborne crude supplies. Similarly, 84% of the world’s iron ore and 47% of the metallurgical coal reaches the shores of these three nations through the seaborne route.

The agricultural commodities will also be affected because China is a major importer of rice and soybeans while Japan is of corn.

Economic costs of the war

War has both a direct and an indirect impact on the economy. South Korea is a hub for manufacturing liquid crystal displays, semiconductors, and cars. A war will impact these activities, leading to a shortage across the globe. The alternative suppliers can’t bridge the gap in such a short span of time.  Therefore, prices of various electronic products are likely to rise significantly, which will impact the developed economies, including the US.

“U.S. spending on electronic items, including smart phones, cameras, tablets and computers accounts for roughly 1 percent of the consumer price inflation basket. If a war in Korea caused prices of these items to double, it would add 1 percentage point to U.S. inflation,” a report by the research consultancy Capital Economics warned, reports CNBC.

If inflation rises sharply, the Central Banks will be forced to raise interest rates, jeopardizing the fledgling global economic recovery.

Additionally, if South Korea’s gross domestic product (GDP) falls by about 50% due to war, it will reduce the global GDP by 1 percentage point, according to the report.

Once the war ends, South Korea will need huge capital to rebuild its infrastructure. If the US involves itself and ends up spending the same amount as it did in Iraq and Afghanistan, then the federal debt will reach 105% of GDP, the economists at Capital Economics warned.

Conclusion

Though historical evidence suggests that the equity market returns are better than average during a war, the situation might be different this time because of the nations involved. Any jolt to the weak economic recovery across the globe will dent the confidence of the investors. Therefore, we don’t expect the stock markets to rise substantially during the war.

Gold’s performance is somewhat neutral and it can be used to protect the value of the portfolio. Therefore, selling some overvalued stocks and buying gold might be a good strategy if a war seems imminent.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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Commodities

WTI Falls Below $59 a Barrel for the First Time in Eight Months; U.S. Set to Dominate Energy Market By 2025, Says EIA

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The oil-price collapse became a record fallout on Tuesday, as U.S. crude futures headed for their longest losing streak ever. In the process, the futures contract dipped below $59.00 a barrel for the first time since February and is now trading at its lowest level since last year.

Oil Prices Sink Further into Bear Territory

U.S. West Texas Intermediate (WTI) futures fell by as much as 2.8% on Tuesday, extending their losing streak to a record 12 days. At the time of writing, WTI was trading down $1.38, or 2.3%, at $58.55 a barrel on the New York Mercantile Exchange. Brent’s decline was equally perilous, with the global benchmark falling $1.60, or 2.3%, to $68.52 a barrel.

Oil prices have lost a swift 23% since Oct 3, when markets were pushing toward multi-year highs. The rout intensified this week after U.S. President Donald Trump criticized Saudi Arabia’s plan to lower production amid the selloff.

The Saudis announced Monday they would scale back output by 500,000 to bring supply back in line with demand. Saudi energy minister Khalid Al-Falih said output cuts of 1 million barrels per day are needed to re-balance the market. This suggests fellow OPEC members are likely to join efforts to reduce output in support of higher prices.

U.S. Set to Dominate Energy Market

America’s reliance on Saudi oil is quickly fading as domestic shale production achieves new economies of scale. According to a new report by the International Energy Agency (IEA), the United States will produce half the world’s oil and gas supply by 2025.

In its annual World Energy Outlook report, the agency said the U.S. will account for roughly 75% of global gas growth over the next six years. It will also account for 40% of the growth in natural gas. At the same time, U.S. shale production is forecast to more than double to 9.2 million barrels per day.

“The shale revolution continues to shake up oil and gas supply, enabling the U.S. to pull away from the rest of the field as the world’s largest oil and gas producer,” the IEA said in its report. “By 2025, nearly every fifth barrel of oil and every fourth cubic meter of gas in the world come from the United States.”

The upsurge in U.S. shale production has eroded OPEC’s dominance of the international energy market. This was most evidently on display in 2014 when a systemic price collapse forced the Saudi-led cartel to adopt new production policies. While the cartel has succeeded in bringing prices above the break-even rate for Middle East producers, it has failed to deter lean shale producers that are capable of generating profits even with the latest drop in prices. This new reality is expected to play out further over the next six years.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 664 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Commodities

Oil Prices Erase Recent Gain as Trump Blasts Saudi Production Policy

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Crude oil suffered a fresh setback early Tuesday, as markets reacted to further fraying of U.S.-Saudi relations after President Donald Trump slammed the kingdom’s energy policy. Hours earlier, Saudi Arabia had announced it would cut crude production by 500,000 barrels per day in December in response to the recent plunge in prices.

Oil Prices Erase Gains

U.S. West Texas Intermediate (WTI) futures plunged to yearly lows on Tuesday, more than offsetting yesterday’s climb. The U.S. futures benchmark bottomed at $58.85 a barrel. It was last seen trading at $59.00 a barrel, down 93 cents, or 1.6%, from the previous close.

The WTI contract officially entered into bear-market territory earlier this month with losses exceeding 20% over the past six weeks. At the beginning of October, crude was tracking four-year highs. Now, prices are struggling to stave off further declines.

Declining crude prices follow a fresh surge in the U.S. dollar, which is currently tracking 16-month highs against a basket of its peers. The DXY dollar basket spiked 0.7% on Monday to 97.54. As a dollar-denominated asset, crude is highly sensitive to changes in the greenback’s value.

Trump Blasts Saudi Oil Policy

Saudi Arabia’s decision to scale back crude production has been met with heavy criticism by U.S. President Donald Trump. In a Monday afternoon tweet, Trump said the following:

“Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!”

The president’s comments came after the Saudis announced plans to lower crude supply by half a million barrels per day beginning next month. The decision was announced by Saudi energy minister Khalid Al Falih in Abu Dhabi following a meeting of OPEC members.

“The consensus among all members is that we need to do whatever it takes to balance the market,” Al Falih said, as quoted by CNN. “If that means trimming supply by a million [barrels per day], we will do it.”

President Trump is under pressure to keep the economy running strong following sizable losses in the House of Representatives during last week’s midterm election. Although the GOP under Trump performed much better than previous administrations, the loss of a House majority threatens to undermine the administration’s goals.

Washington was relying on Saudi Arabia to keep the global market well supplied, and oil prices down, in the wake of renewed sanctions on Iran. U.S.-Saudi relations have also deteriorated over the killing of journalist Jamal Khashoggi at the Saudi consulate in Turkey last month.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 664 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Commodities

Oil Prices Officially Enter Bear Market

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Crude oil extended its slide on Thursday, with the U.S. futures benchmark encroaching into bear-market territory following weeks of relentless declines.

WTI Succumbs to the Bears

Crude futures were down across the board in the latter half of the week, as concerns over rising stockpiles and higher production continued to grip the market. The West Texas Intermediate (WTI) contract for U.S. crude reached a low of $60.67 a barrel on the New York Mercantile Exchange. It was last down 24 cents, or 0.4%, a $61.43 a barrel. Brent crude declined 28 cents, or 0.4%, to $71.80 a barrel on London’s ICE futures exchange.

WTI has officially entered bear market territory, which is defined as a fall of 20% or more from a recent high. The 20% threshold was met on Thursday as prices resumed their relentless drop from four-year highs set on Oct. 3. Market sentiment has shifted dramatically over that stretch, with investors now fearful that Saudi Arabia and Russia will more than offset a loss of Iranian exports following the resumption of U.S. sanctions against Tehran.

Higher Production on the Horizon

Russia and the Saudis aren’t the only players expected to ramp up production in the near future. The U.S. Energy Information Administration (EIA) recently upped its outlook on domestic crude production, calling for 12.1 million barrels per day in 2019 compared with a previous estimate of 10.9 million barrels per day.
EIA data on Wednesday showed a sharp rise in weekly crude inventories, placing further pressure on oil prices. Commercial stockpiles surged by 5.8 million barrels in the week ended Nov. 2, bringing the total inventory to 432 million barrels. That’s the highest since early June.

Meanwhile, members of the Organization of the Petroleum Exporting Countries (OPEC) are expected to meet this weekend to go over market fundamentals and determine whether additional supply cuts are warranted. Analysts at Commerzbank believe the cartel may have no choice but to scale back output to re-balance the market. The Saudi-led production group will meet in Abu Dhabi on Sunday.

In other news, October was another record-setting month for Chinese crude imports as the world’s second-largest economy stocked up on Iranian barrels before U.S. sanctions took effect. China imported an average of 9.6 million barrels per day last month, government data showed on Thursday.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 664 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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